Tax Cuts Fuel New Debate--Who’s ‘Rich’? Democrats, GOP use different figures to argue merits of legislation.

The current debate over the tax-cut bills now going through Congress has uncovered a sensitive spot in the American psyche: Call better-off Americans whatever else you want, but for goodness sake, don’t call them rich.

The controversy has erupted over Democrats’ contentions that too large a share of the tax cuts would go to “rich” Americans. Clinton administration figures suggest 65% of the relief would benefit the best-off 20% of Americans, with the top 5% getting 30% of the breaks.

The charges are based on Treasury Department calculations that show this highest fifth of the nation’s economic scale to include households with total incomes of $93,222 or more. Presumably, if you are among this 20% of Americans, you qualify as “rich.”

But the administration’s computations have sparked a counterattack by Republicans--joined by thousands of irate taxpayers--who contend the Treasury Department is inflating the income figures to make it seem that more Americans are “rich” than actually is the case.

“I think a lot of this is that people are upset about others telling them that they’re rich when they really aren’t rich,” says William G. Gale, a Brookings Institution tax expert. “Everyone kind of thinks of themselves as middle class.”

Congressional Republicans offer their own calculations showing the income category for the top 20% of Americans starts at only $63,941--a level they contend is decidedly middle class. Data compiled by the Census Bureau shows similar results.

Rep. Bill Archer (R-Texas), chairman of the House Ways and Means Committee, complains that administration officials “cook their books” by adding “artificial items to the incomes of middle-income Americans so they can pretend that the tax relief . . . is going to the rich.”

The big difference comes because the Treasury bases its estimates not just on the size of Americans’ paychecks but on “imputed” income--a concept that also counts untaxed items, such as company fringe benefits, to reflect a person’s overall economic status.

What seems to be drawing the most ire is that the Treasury’s computations also count the “imputed” value of housing. Thus, if you have paid off your mortgage, officials calculate your income as including what you otherwise would have had to pay in rent.

Experts say that from an economist’s viewpoint, such reasoning is defensible: If everyone else has to pay rent or mortgage payments and you do not, then you effectively have several thousand dollars more to spend than other families. As a result, you are visibly better off.

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Understandably, not everyone outside economists’ circles sees the logic in that. “I mean, who in America understands what imputed rent is?” grouses Sen. Kay Bailey Hutchison (R-Texas).

“It’s totally backward,” Hutchison asserts. “I think the president should just give up on imputed income,” she says. Instead, she contends, he should order the Treasury to define income simply as “what people can spend.”

To be sure, there may be no way to smooth the feathers of taxpayers who feel they have been maligned by computations that are based on “imputed” income. But there are some points that might help put the issue into perspective:

* Contrary to critics’ suggestions, the idea of using imputed income to calculate the impact of a particular tax bill did not originate with Clinton. It began in 1984, during the Reagan administration, as a way to figure the effects of its tax-reform plan.

* The concept is used only to illustrate the impact of tax legislation and does not affect anyone’s actual tax liability. “No one is being taxed on the basis of imputed [rental] income,” Lyle E. Gramley, a former Federal Reserve Board member, points out.

* Although the use of imputed income may give the Democrats a small propaganda advantage--by inflating the dollar amounts for various income categories--the group making up the top 20% of income categories involves essentially the same households, no matter which system is used.

“Ultimately, I don’t think it really matters,” Daniel J. Mitchell, a tax specialist at the conservative Heritage Foundation, says.

* Wrongheaded as it may seem to count “imputed rent” as income for homeowners, it has only a modest impact on the aggregate figures. Out of 100 million U.S. households, only 22 million have paid off their mortgages, and it is only a small part of the overall calculation.

* The tax relief in the pending tax bill is skewed heavily toward better-off taxpayers largely because of the type of tax cuts it provides. Poor Americans generally do not have much in the way of capital gains--profits from the sale of stocks or other assets--or inheritances.

The Republicans’ most cogent defense is that the tax relief goes primarily to the people who pay the bulk of the taxes--mainly those in the middle- and upper-income groups. “This bill provides tax relief for tax payers,” Sen. Phil Gramm (R-Texas) declares.

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Boundary Lines

The Treasury Department, the congressional Joint Committee on Taxation and the Census Bureau all use different calculations to decide what household income levels constitute the boundary lines for the richest fifth of Americans, the second-richest and so on.

Here is a comparison of each:

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Treasury Department Joint Committee Census Bureau Richest fifth 93,222 63,941 65,124 of population Second richest fifth 54,758 39,356 42,002 Middle fifth 32,563 24,244 26,914 Second-poorest fifth 16,950 12,261 14,400

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Source: House Ways and Means Committee